DOCSLIB.ORG

Market Analysis Technical Handbook Maryann [email protected] Fred Meissner, Jr

Total Page：16

File Type：pdf, Size：1020Kb

Download full-text PDF Read full-text
Market Analysis Technical Handbook Maryann Bartels@Ml.Com Fred Meissner, Jr Concepts in technical analysis Technical Analysis Market Analysis | United States 18 July 2007 A Handbook of the basics Mary Ann Bartels +1 212 449 8038 Technical Research Analyst MLPF&S Market Analysis Technical Handbook [email protected] Fred Meissner, Jr. CMT +1 212 449 2603 Technical Research Analyst We cover the basics of Trend, Momentum and other MLPF&S technical indicators and methods [email protected] Table of Contents Introduction 3 Trends 5 Price Momentum Indicators 14 Reversals 17 The Importance of Volume 24 Support and Resistance 28 Market Breadth 31 Market Sentiment 39 The Fibonacci Concept 43 Putting It Together 49 Merrill Lynch does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. Refer to important disclosures on page 53. 10633344 Concepts in technical analysis 18 July 2007 Contents Introduction 3 Trends 5 Price Momentum Indicators 14 Reversals 17 The Importance of Volume 24 Support and Resistance 28 Market Breadth 31 Market Sentiment 39 The Fibonacci Concept 43 Putting It Together 49 2 Concepts in technical analysis 18 July 2007 Introduction Price action of stocks, or financial markets in general, is a reflection of human nature. Price trends seem to be determined by investors’ decisions in response to a complex mix of psychological, sociological, political, economic and monetary factors. Technical analysis attempts to measure the strength of these trends and to forewarn of potential changes in these trends. Technical analysis focuses on the status and prospects of a company's stock performance. "Technical analysis is the science of recording, usually in graphic form, the actual history of trading (price changes, volume of transactions, etc.) in a certain stock or in "the averages" and then deducing from that pictured history the probable future trend". Edwards & Magee Technical Analysis of Stock Trends At any given time, the price of a company's stock is determined by the forces of supply and demand. Supply and demand indications are typically mirrored into transactions data. "The market price reflects not only the differing value opinions of many orthodox security appraisers, but also all the hopes and fears and guesses and moods, rational and irrational, of hundreds of potential buyers and sellers, as well as their needs and the resources – in total, factors which defy analysis and for which no statistics are obtainable, but which are nevertheless all synthesized, weighed and finally expressed into one precise figure at which the buyer and the seller get together and make a deal". Edwards & Magee Technical Analysis of Stock Trends "The art of technical analysis ... is to identify trend changes at an early stage and to maintain an investment posture until the weight of the evidence indicates that the trend has reversed". Martin J. Pring Technical Analysis Explained Thus, technical analysis is generally a less time-consuming method of stock selection than is fundamental analysis and is based more on the actual performance of a stock than on its prospects for performance. This benefits investors and/or traders because they can broaden their pool of potential investment vehicles as technical analysis is less time-consuming. They can participate in a trend as it is unfolding because it is more timely. They are more likely to sell a stock that begins to go against them because of less emotional attachment. Technical analysis has undergone a major transformation since its early years. It began when traders noticed recurring price patterns in the securities that they traded and remained the art of visually inspecting price charts for such patterns. Through time, more scientific disciplines contributed to technical analysis. Mathematical expressions were devised to describe momentum, acceleration and changes of trend. Physics weighed in with many of its contributions from mechanics (vector analysis) to electro- 3 Concepts in technical analysis 18 July 2007 magnetism (cycle studies and spectral analysis). Throughout its development, technical analysis has been monitored by statistical concepts that keep tabs on what seems to be working and what doesn’t. In its optimal form, technical analysis truly involves a great deal of scientific concepts and discipline. The indicators that we will bring to your attention have mathematical expressions. They have been back-tested to show statistical validity. Even visual price patterns can be identified by computer algorithms, to a great degree, and tested for their validity. The area of neural network study and the advent of abundant computing power have enabled us recently to test a wide variety of indicators on each individual stock that we wish to follow. We are able to tweak the parameters of these indicators so that they best express the performance of each stock. Indeed, the future of technical analysis seems to be trending toward customizing indicators to best predict individual stock performance. Most traders do not have the software resources or the time to do the extensive optimization that we alluded to in the previous paragraph. So, for practical purposes, we will discuss a few indicators and the parameters that seem to work best across most stocks. In such a context, we need to realize that technical indicators are nothing more than tools, and their reliability varies over time. The more indicators that seem to agree on a certain direction, the more likely that the signal will be valid. The tools that follow should be thought of as inputs that will eventually be used in forming a larger consensus regarding market opinion or specific buy and sell decisions on individual stock issues. These concepts have withstood rigorous testing over many years. There will be times when they will mesh together and work flawlessly. There will also be times when there will be no clear consensus among indicators or they will simply fail. We must stress at the outset that technical analysis is an exercise in probabilities. As such, there will be times when we will have to accept losing trades. But through judicious use of the indicators and some prudent money management, we're very confident that the concepts discussed here will help in your investment decisions. 4 Concepts in technical analysis 18 July 2007 Trends A trend – simply put – is the direction in which the price trend is heading. Typically, there are three choices: Positive or advancing trend. Negative or declining trend. Neutral or sideways trading range. Making an assessment of the prevailing trend is important because most of the money to be made is by positioning your trading with the trend. We want to be buying big in up-trends and selling big in downtrends. In the case of neutral trends, we want to identify the upper and lower limits so that we might buy close to the lows and sell close to the highs. Positive Trend Characterized by higher highs and higher lows In a positive trend each up move extends to new price highs while the sell-offs in between do not decline as far as the price levels seen on previous sell-offs. Drawing a line through the lows yields the positive trend line. Positive trend Source: Merrill Lynch Market Analysis Negative Trend Characterized by lower highs and lower lows In a negative trend each down move extends to new price lows while rallies in between do not advance as far as the price levels seen on previous rallies. Drawing a line through the highs yields the negative trend line. 5 Concepts in technical analysis 18 July 2007 Negative trend Source: Merrill Lynch Market Analysis Neutral Trend Characterized by a sideways trading range In a neutral trend the price pattern typically oscillates between an upper limit and a lower limit. Drawing lines through these upper limits and lower limits identifies the trading range. Neutral trend Source: Merrill Lynch Market Analysis When speaking of trends, it is important to specify the relevant timeframe that you are looking at. It is possible for single chart to show all three trend-types, depending on the time scale on which you focus. The chart below shows why specifying a timeframe in describing a trend is important. This particular chart can show a negative, neutral, or positive trend, depending on the relevant period of time at which one is looking. For example, from December ’98 to December ’99, the stock underwent a long-term downtrend. Between October ’99 and the end of the chart, the price pattern is range-bound, indicating an intermediate-term neutral trend or trading range. Short-term, between January 26, 2000 and the end of the chart, the daily pattern of higher- highs and higher-lows indicates an up trend. 6 Concepts in technical analysis 18 July 2007 SWY chart Source: Merrill Lynch Market Analysis The description of time varies among traders. What an aggressive trader sees as long-term, a more conservative trader might see as short-term. For practical purposes, we will structure our working definitions of time as follows: Short-Term: Typically a few weeks in duration. Intermediate-Term: Typically a few months in duration. Long-Term: Typically a year or more in duration. It has been our experience that most valid interpretations, and the most useful and accurate indicators, are typically geared toward the intermediate-term. Using the intermediate-term timeframe as our focus, we will fudge our time designations when they become somewhat ambiguous. When our expectations fall somewhere between the short- and intermediate-term, we might say shorter-term. When our expectations fall somewhere between the intermediate and long-term, we might say longer-term.
Load more

Recommended publications
  • Free Stock Screener Page 1
    Free Stock Screener www.dojispace.com Page 1 Disclaimer The information provided is not to be considered as a recommendation to buy certain stocks and is provided solely as an information resource to help traders make their own decisions. Past performance is no guarantee of future success. It is important to note that no system or methodology has ever been developed that can guarantee profits or ensure freedom from losses. No representation or implication is being made that using The Shocking Indicator will provide information that guarantees profits or ensures freedom from losses. Copyright © 2005-2012. All rights reserved. No part of this book may be reproduced or transmitted in any form or by any means, electronic or mechanical, without written prior permission from the author. Free Stock Screener www.dojispace.com Page 2 Bullish Engulfing Pattern is one of the strongest patterns that generates a buying signal in candlestick charting and is one of my favorites. The following figure shows how the Bullish Engulfing Pattern looks like. The following conditions must be met for a pattern to be a bullish engulfing. 1. The stock is in a downtrend (short term or long term) 2. The first candle is a red candle (down day) and the second candle must be white (up day) 3. The body of the second candle must completely engulfs the first candle. The following conditions strengthen the buy signal 1. The trading volume is higher than usual on the engulfing day 2. The engulfing candle engulfs multiple previous down days. 3. The stock gap up or trading higher the next day after the bullish engulfing pattern is formed.
    [Show full text]
  • Intermediate Indicators Section Review Questions
    Section 9 Intermediate Indicators Section Review Questions Question 1 Which of the following statements about Average Directional Index (ADX) is NOT true? a) The ADX measures trend strength without regard to trend direction b) +DI and –DI are used to define directional movement when interpreting ADX c) The DI crossover system can be used to identify potential buy and sell signals d) A strong trending market is present when the ADX is above 50 Question 2 Which of the following are commonly used potential buy and sell signals when interpreting Moving Average Convergence Divergence (MACD)? a) Signal Line Crossover b) Centerline Crossover c) Divergences d) All of the above Question 3 The Money Flow Index (MFI) is also known as: a) Volume-weighted ADX b) Volume-weighted RSI c) Price-weighted Stochastics d) Price-weighted MACD Question 4 The default look-back period for calculating the Relative Strength Index (RSI) is? a) 12 b) 20 c) 14 d) 10 Question 5 When looking at the following indicators, which one is in overbought territory based on the traditional settings for each indicator? a) Slow Stochastics b) Money Flow Index c) Relative Strength Index d) All of the above Question 6 Which of the following statements is NOT true concerning On Balance Volume (OBV)? a) OBV is based on the theory that volume precedes price b) OBV was developed by Joe Granville c) Divergences should NOT be used to anticipate trend reversals when analyzing OBV d) OBV can be used to confirm a price trend Question 7 Which of the following are considered Market Breadth Indicators? a) Advance-Decline Line b) McClellan Oscillator c) Arms Index d) All of the above Section 9 Intermediate Indicators Section Review Answers 1) d 2) d 3) b 4) c 5) a 6) c 7) d .
    [Show full text]
  • User Guide Index-Lab
    Index-Lab User Guide © 2004-2009 FMR LLC. All rights reserved. Index-Lab User Guide by FMR LLC Revised: Friday, January 30, 2009 Index-Lab User Guide © 2004-2009 FMR LLC. All rights reserved. No parts of this work may be reproduced in any form or by any means - graphic, electronic, or mechanical, including photocopying, recording, taping, or information storage and retrieval systems - without the written permission of the publisher. Third party trademarks and service marks are the property of their respective owners. While every precaution has been taken in the preparation of this document, the publisher and the author assume no responsibility for errors or omissions, or for damages resulting from the use or misuse of information contained in this document or from the use or misuse of programs and source code that may accompany it. In no event shall the publisher and the author be liable for any loss of profit or any other commercial damage caused or alleged to have been caused directly or indirectly by this document. Printed: Friday, January 30, 2009 Special thanks to: Wealth-Lab's great on-line community whose comments have helped make this manual more useful for veteran and new users alike. EC Software, whose product HELP & MANUAL printed this document. I User Guide, Index-Lab Table of Contents Foreword 0 Part I Introduction 2 1 Index-Lab Overview........... ........................................................................................................................ 2 2 Wealth-Lab Online......... .Community...................
    [Show full text]
  • Understanding Oscillators and Other Indicators
    UNDERSTANDING OSCILLATORS AND OTHER INDICATORS Used in By Tom McClellan and Sherman McClellan UNDERSTANDING OSCILLATORS AND OTHER INDICATORS Used in Tile McClellan Market Report By Tom McClellan and Sherman McClellan No single indicator can show the whole picture of what the market is doing. A variety of carefully crafted indicators measuring selected stock market and interest rate data forms the basis for the integrated technical analysis provided in The McClellan Market Report. By looking at several different tools and using different time frames, we can better identify the forces acting to change the market. Our goal is to understand the probable future market structure based on our analysis of what has happened in the past. In each issue of The McClellan Market Report, there will be charts of several indices and indicators which we find meaningful in interpreting market action. Some of these are common indices that many analysts use, and some are completely of our own invention. Each of these indicators provides its piece to the puzzle of how the market might behave in the future. This booklet has been written in order that you may better understand the indicators we use, their methods of calculation, and our rationale for using them. Our objective in this booklet is for you, the reader, to be comfortable in their use and be able to integrate their messages into your trading or investing. To help you understand our analytical techniques, it is important to first understand a few basic definitions of terms used to describe our indicators. MOVING AVERAGES The most satisfactory investing comes whe~ the market is trending and you invest with the trend of the market.
    [Show full text]
  • Lecture 20: Technical Analysis Steven Skiena
    Lecture 20: Technical Analysis Steven Skiena Department of Computer Science State University of New York Stony Brook, NY 11794–4400 http://www.cs.sunysb.edu/∼skiena The Efficient Market Hypothesis The Efficient Market Hypothesis states that the price of a financial asset reflects all available public information available, and responds only to unexpected news. If so, prices are optimal estimates of investment value at all times. If so, it is impossible for investors to predict whether the price will move up or down. There are a variety of slightly different formulations of the Efficient Market Hypothesis (EMH). For example, suppose that prices are predictable but the function is too hard to compute efficiently. Implications of the Efficient Market Hypothesis EMH implies it is pointless to try to identify the best stock, but instead focus our efforts in constructing the highest return portfolio for our desired level of risk. EMH implies that technical analysis is meaningless, because past price movements are all public information. EMH’s distinction between public and non-public informa- tion explains why insider trading should be both profitable and illegal. Like any simple model of a complex phenomena, the EMH does not completely explain the behavior of stock prices. However, that it remains debated (although not completely believed) means it is worth our respect. Technical Analysis The term “technical analysis” covers a class of investment strategies analyzing patterns of past behavior for future predictions. Technical analysis of stock prices is based on the following assumptions (Edwards and Magee): • Market value is determined purely by supply and demand • Stock prices tend to move in trends that persist for long periods of time.
    [Show full text]
  • Technical Analysis, Liquidity, and Price Discovery∗
    Technical Analysis, Liquidity, and Price Discovery∗ Felix Fritzy Christof Weinhardtz Karlsruhe Institute of Technology Karlsruhe Institute of Technology This version: 27.08.2016 Abstract Academic literature suggests that Technical Analysis (TA) plays a role in the decision making process of some investors. If TA traders act as uninformed noise traders and generate a relevant amount of trading volume, market quality could be affected. We analyze moving average (MA) trading signals as well as support and resistance levels with respect to market quality and price efficiency. For German large-cap stocks we find excess liquidity demand around MA signals and high limit order supply on support and resistance levels. Depending on signal type, spreads increase or remain unaffected which contra- dicts the mitigating effect of uninformed TA trading on adverse selection risks. The analysis of transitory and permanent price components demonstrates increasing pricing errors around TA signals, while for MA permanent price changes tend to increase of a larger magnitude. This suggests that liquidity demand in direction of the signal leads to persistent price deviations. JEL Classification: G12, G14 Keywords: Technical Analysis, Market Microstructure, Noise Trading, Liquidity ∗Financial support from Boerse Stuttgart is gratefully acknowledged. The Stuttgart Stock Exchange (Boerse Stuttgart) kindly provided us with databases. The views expressed here are those of the authors and do not necessarily represent the views of the Boerse Stuttgart Group. yE-mail: [email protected]; Karlsruhe Institute of Technology, Research Group Financial Market Innovation, Englerstrasse 14, 76131 Karlsruhe, Germany. zE-mail: [email protected]; Karlsruhe Institute of Technology, Institute of Information System & Marketing, Englerstrasse 14, 76131 Karlsruhe, Germany.
    [Show full text]
  • Candlestick Patterns
    INTRODUCTION TO CANDLESTICK PATTERNS Learning to Read Basic Candlestick Patterns www.thinkmarkets.com CANDLESTICKS TECHNICAL ANALYSIS Contents Risk Warning ..................................................................................................................................... 2 What are Candlesticks? ...................................................................................................................... 3 Why do Candlesticks Work? ............................................................................................................. 5 What are Candlesticks? ...................................................................................................................... 6 Doji .................................................................................................................................................... 6 Hammer.............................................................................................................................................. 7 Hanging Man ..................................................................................................................................... 8 Shooting Star ...................................................................................................................................... 8 Checkmate.......................................................................................................................................... 9 Evening Star ....................................................................................................................................
    [Show full text]
  • Investing with Volume Analysis
    Praise for Investing with Volume Analysis “Investing with Volume Analysis is a compelling read on the critical role that changing volume patterns play on predicting stock price movement. As buyers and sellers vie for dominance over price, volume analysis is a divining rod of profitable insight, helping to focus the serious investor on where profit can be realized and risk avoided.” —Walter A. Row, III, CFA, Vice President, Portfolio Manager, Eaton Vance Management “In Investing with Volume Analysis, Buff builds a strong case for giving more attention to volume. This book gives a broad overview of volume diagnostic measures and includes several references to academic studies underpinning the importance of volume analysis. Maybe most importantly, it gives insight into the Volume Price Confirmation Indicator (VPCI), an indicator Buff developed to more accurately gauge investor participation when moving averages reveal price trends. The reader will find out how to calculate the VPCI and how to use it to evaluate the health of existing trends.” —Dr. John Zietlow, D.B.A., CTP, Professor of Finance, Malone University (Canton, OH) “In Investing with Volume Analysis, the reader … should be prepared to discover a trove of new ground-breaking innovations and ideas for revolutionizing volume analysis. Whether it is his new Capital Weighted Volume, Trend Trust Indicator, or Anti-Volume Stop Loss method, Buff offers the reader new ideas and tools unavailable anywhere else.” —From the Foreword by Jerry E. Blythe, Market Analyst, President of Winthrop Associates, and Founder of Blythe Investment Counsel “Over the years, with all the advancements in computing power and analysis tools, one of the most important tools of analysis, volume, has been sadly neglected.
    [Show full text]
  • The Complete Guide to Market Breadth Indicators 00Morris-FM 8/11/05 5:57 PM Page Ii 00Morris-FM 8/11/05 5:57 PM Page Iii
    00Morris-FM 8/11/05 5:57 PM Page i The Complete Guide to Market Breadth Indicators 00Morris-FM 8/11/05 5:57 PM Page ii 00Morris-FM 8/11/05 5:57 PM Page iii The Complete Guide to Market Breadth Indicators How to Analyze and Evaluate Market Direction and Strength Gregory L. Morris McGraw-Hill New York Chicago San Francisco Lisbon London Madrid Mexico City Milan New Delhi San Juan Seoul Singapore Sydney Toronto 00Morris-FM 8/11/05 5:57 PM Page iv Copyright © 2006 by The McGraw-Hill Companies. All rights reserved. Printed in the United States of America. Except as permitted under the United States Copyright Act of 1976, no part of this publication may be reproduced or dis- tributed in any form or by any means, or stored in a data base or retrieval sys- tem, without the prior written permission of the publisher. 1 2 3 4 5 6 7 8 9 0 DOC/DOC 0 9 8 7 6 ISBN 0-07-144443-2 McGraw-Hill books are available at special quantity discounts to use as pre- miums and sales promotions, or for use in corporate training programs. For more information, please write to the Director of Special Sales, Professional Publishing, McGraw-Hill, Two Penn Plaza, New York, NY 10121-2298. Or con- tact your local bookstore. This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is sold with the understanding that neither the author nor the publisher is engaged in rendering legal, accounting, or other professional service.
    [Show full text]
  • Identifying Chart Patterns with Technical Analysis
    746652745 A Fidelity Investments Webinar Series Identifying chart patterns with technical analysis BROKERAGE: TECHNICAL ANALYSIS BROKERAGE: TECHNICAL ANALYSIS Important Information Any screenshots, charts, or company trading symbols mentioned are provided for illustrative purposes only and should not be considered an offer to sell, a solicitation of an offer to buy, or a recommendation for the security. Investing involves risk, including risk of loss. Past performance is no guarantee of future results Stop loss orders do not guarantee the execution price you will receive and have additional risks that may be compounded in pe riods of market volatility. Stop loss orders could be triggered by price swings and could result in an execution well below your trigg er price. Trailing stop orders may have increased risks due to their reliance on trigger pricing, which may be compounded in periods of market volatility, as well as market data and other internal and external system factors. Trailing stop orders are held on a separat e, internal order file, place on a "not held" basis and only monitored between 9:30 AM and 4:00 PM Eastern. Technical analysis focuses on market action – specifically, volume and price. Technical analysis is only one approach to analyzing stocks. When considering which stocks to buy or sell, you should use the approach that you're most comfortable with. As with all your investments, you must make your own determination as to whether an investment in any particular security or securities is right for you based on your investment objectives, risk tolerance, and financial situation. Past performance is no guarantee of future results.
    [Show full text]
  • Technical-Analysis-Bloomberg.Pdf
    TECHNICAL ANALYSIS Handbook 2003 Bloomberg L.P. All rights reserved. 1 There are two principles of analysis used to forecast price movements in the financial markets -- fundamental analysis and technical analysis. Fundamental analysis, depending on the market being analyzed, can deal with economic factors that focus mainly on supply and demand (commodities) or valuing a company based upon its financial strength (equities). Fundamental analysis helps to determine what to buy or sell. Technical analysis is solely the study of market, or price action through the use of graphs and charts. Technical analysis helps to determine when to buy and sell. Technical analysis has been used for thousands of years and can be applied to any market, an advantage over fundamental analysis. Most advocates of technical analysis, also called technicians, believe it is very likely for an investor to overlook some piece of fundamental information that could substantially affect the market. This fact, the technician believes, discourages the sole use of fundamental analysis. Technicians believe that the study of market action will tell all; that each and every fundamental aspect will be revealed through market action. Market action includes three principal sources of information available to the technician -- price, volume, and open interest. Technical analysis is based upon three main premises; 1) Market action discounts everything; 2) Prices move in trends; and 3) History repeats itself. This manual was designed to help introduce the technical indicators that are available on The Bloomberg Professional Service. Each technical indicator is presented using the suggested settings developed by the creator, but can be altered to reflect the users’ preference.
    [Show full text]
  • Technical Analysis: Technical Indicators
    Chapter 2.3 Technical Analysis: Technical Indicators 0 TECHNICAL ANALYSIS: TECHNICAL INDICATORS Charts always have a story to tell. However, from time to time those charts may be speaking a language you do not understand and you may need some help from an interpreter. Technical indicators are the interpreters of the Forex market. They look at price information and translate it into simple, easy-to-read signals that can help you determine when to buy and when to sell a currency pair. Technical indicators are based on mathematical equations that produce a value that is then plotted on your chart. For example, a moving average calculates the average price of a currency pair in the past and plots a point on your chart. As your currency chart moves forward, the moving average plots new points based on the updated price information it has. Ultimately, the moving average gives you a smooth indication of which direction the currency pair is moving. 1 2 Each technical indicator provides unique information. You will find you will naturally gravitate toward specific technical indicators based on your TRENDING INDICATORS trading personality, but it is important to become familiar with all of the Trending indicators, as their name suggests, identify and follow the trend technical indicators at your disposal. of a currency pair. Forex traders make most of their money when currency pairs are trending. It is therefore crucial for you to be able to determine You should also be aware of the one weakness associated with technical when a currency pair is trending and when it is consolidating.
    [Show full text]